The Spring Budget

Traditionally, Spring Budgets are held on a Wednesday in mid-March, shortly before the end of the tax year. In 2024 the Budget will be on 6 March, the first Wednesday of the month. The reason the Budget is arriving just sixteen weeks after the Autumn Statement revolves around the complexities of election timing. If the government decides on a May election to coincide with the local elections on the 2nd, then the law says that an election would have to be called in the week beginning 25 March. That deadline brings forward the date for the Budget, given all that must be done ahead of dissolving Parliament, including passing a post-Budget shortened Finance Bill.

The early Budget potentially complicates tax year end planning in 2024. It is often suggested that any planning is completed before Budget Day, as some of the Chancellor’s measures may take effect from the beginning of the day. Such a cautious approach is probably less important in an election year as the Chancellor is likely to defer any mention of tax-raising proposals – the ones which often take immediate effect – until after the polls have closed.

Either way, now is a good time to start reviewing your clients’ options. The last day of the 2023/24 tax year is Friday 5 April, a week after Good Friday.

The 2023/24 year end checklist

The list of the areas to consider as the year end approaches has similarities with past years, but there are several new factors that specifically relate to 2023/24:

SELF-EMPLOYMENT INCOME

If your clients are self-employed and your accounting year end is not between 31 March and 5 April, the amount of their profits subject to income tax in 2023/24 will be affected by basis period reform. How this will impact your clients depends upon a variety of factors, but one consequence for many people will be that more than twelve months of profits will be taxable in 2023/24. The earlier in the tax year your accounting year ends, the greater the impact. For example, if your client has an accounting year end of 30 April – a date once recommended for maximum tax deferral – then, after special transitional relief, your client could find themself with the equivalent of a little over 14 months profits taxable in 2023/24.

Any year end planning needs to take account of this income boost, which will also apply for the following four tax years, unless clients opt out of the automatic transitional relief. An opt out can make sense in some circumstances, but the decision to do so and the strategies to then adopt require expert advice.

A starting point for your clients to learn more is HMRC’s simplified guidance, available  here.

PENSIONS

2023/24 is a different year end for pension planning from its predecessors for two main reasons:

• The lifetime allowance, which in past tax years has set a tax-efficient ceiling on the total value of clients’ pension benefits, is halfway through a legislative process that will see it disappear from 6 April 2024. How long it remains out of sight is uncertain, as the Labour Party has said it would reinstate the lifetime allowance if it came to power.

• The main annual allowance, which sets the maximum tax-efficient level of total contributions in a tax year, was increased to £60,000 for 2023/24. The minimum allowance which applies when tapering operates, or the money purchase annual allowance has been triggered, rose to £10,000. For earlier tax years the limits were (and remain) £40,000 and £4,000.

Either (or both) changes could mean that your clients are now able to make pension contributions whereas, in previous years, it made no tax sense to do so. However, given the impending election, that renewed opportunity may not last for long.

5 April 2024 is the final date for taking advantage any unused pension annual allowance (up to £40,000) dating back to 2020/21. If your client isor has been a member of a final salary scheme, the calculations necessary can take time, so this is not something to leave until the last moment. Beyond making use of any unused 2020/21 annual allowance before the opportunity is lost, clients should also consider:

• The additional rate income tax threshold was cut from £150,000 to £125,140 in 2023/24, while the higher rate threshold was frozen. Clients’ marginal tax rate may therefore have increased and, with it, the tax saving a pension contribution can offer – even before clients consider any consequences of the basis period reform (please see above).  

• Scotland has made significant changes to income tax for higher earners taking effect in 2024/25. There will be a new advanced rate of tax (at 45%) for earnings between £75,000 and £125,140 and the top rate, which applies to earnings above that level, will rise from 47% to 48%. In some instances, clients could therefore receive more tax relief by deferring all or part of their pension contribution until after 5 April.

ISAs

2023/24 and the coming tax year are both marked by changes that increase the tax burden for investors:

• The dividend allowance was halved to £1,000 for 2023/24 and will be halved again to just £500 from 2024/25. HMRC estimates that around three quarters of people who receive dividends will be affected by these changes.

• The capital gains tax (CGT) annual exemption was cut from £12,300 to £6,000 for 2023/24. It will halve again, to £3,000, from 2024/25 onwards. The result will be over a quarter of a million new CGT payers, according to HMRC, some of whom will be dragged into the self-assessment regime for the first time.  

This double serving of extra investment tax reinforces the importance of ISAs. Even if an allowance of £500 and an exemption of £3,000 is enough for your clients at present, it may not be in the future. Neither figure is index-linked, and each year’s ISA subscription is a use-it-or-lose-it opportunity. As a reminder, all ISAs offers four tax benefits:

• Interest earned on fixed interest securities and cash is free of UK income tax.

• Dividends are also free of UK income tax (but may be subject to foreign withholding tax).

• Capital gains are free of UK CGT.

• ISA income and gains do not have to be reported on your tax return.

The maximum total contribution to ISAs is £20,000 per tax year for 2023/24 and 2024/25, while for Junior ISAs (JISAs), the maximum is £9,000. However, at present, a 16- or 17-year-old can have a JISA and also open a £20,000 ISA (cash component only). This anomaly, which has existed for some years, will be ended from 6 April 2024, when the minimum opening age for an ‘adult’ ISA will rise to 18.

CGT

The dramatic cuts to the CGT annual exemption explained above mean that it is more important than before to consider whether your clients can and should use their annual exemption by 5 April, when it halves to £3,000. While 2023 was a near flat year for the UK stock market – the FTSE 100 was up 3.8% – many overseas markets posted strong gains, notably the USA where the S&P 500 added 25%. Realising some of those gains to offset against clients’ exemption could be a wise move, as any unused exemption cannot be carried forward.

INHERITANCE TAX (IHT)

In the run up to the Autumn Statement there were a variety of rumours about what might happen to IHT, including its abolition. In the event, the tax survived unscathed. The cost of scrapping IHT would initially be about £7.6bn a year, roughly three quarters of the cost of the national insurance contribution (NIC) reductions, which effect a vastly larger (voting) audience. That type of calculation will always make IHT a difficult tax to eliminate or reduce substantially.

Instead, IHT remains subject to revenue-raising benign neglect. The main nil rate band was set at its current level (£325,000) in April 2009 and, had it been index-linked since then, in 2024/25 it would be over £500,000. The prolonged freeze, currently due to carry on until 5 April 2028, has dragged a growing number of estates into the IHT net and added to the tax bill of those already within it. One way to reduce the tax’s impact on your clients’ children (and grandchildren) is to ensure that they use the available yearly exemptions:

1. The annual exemption. Each tax year your clients can give away £3,000 free of IHT. If they did not use all the exemption in 2022/23, it can be carried forward to this tax year (and no further), but it can only be used after clients have used the current tax year’s exemption. For example, if a client made no gifts in 2022/23, and gifted £5,000 in 2023/24, they will be treated as having used their full 2023/24 exemption and £2,000 from the previous tax year.

2. The small gifts exemption. Clients can give up to £250 outright per tax year free of IHT to as many people as they wish, so long as they do not receive any part of the £3,000 exemption.

3. The normal expenditure exemption. The normal expenditure exemption is potentially the most valuable of the yearly IHT exemptions and one which is not a long-time frozen cash number. Any gift, regardless of size, escapes IHT under the exemption provided that:

• it is made regularly;

• the source of the gift is your clients’ income (including ISA income, but excluding investment bond and other capital withdrawals); and

• the sum gifted does not reduce their standard of living.

VENTURE CAPITAL TRUSTS (VCTs) AND ENTERPRISE INVESTMENT SCHEMES (EISs)

Subject to generous limits, dividends from qualifying VCT investments are tax free, and both VCTs and EISs offer:

• Income tax relief at 30% on fresh investment, regardless of the client’s personal tax rate; and

• freedom from CGT on any profits.

VCTs and EISs focus on investments in small, relatively young, high risk companies. In recent years these schemes have increasingly attracted funds from high earners for whom pension contributions made no sense.

BUSINESS INCOME PLANNING

If your client is a shareholder director in a company, it might be worth bringing forward the payment of any dividend or bonus into this tax year, rather than leaving it until 2024/25. Whether to do so is a complex calculation because of all the tax changes that have and will take place:

In favour of early payment:

• The further reduction in the dividend allowance.

• The frozen higher rate and additional/top rate thresholds.

• The arrival in 2024/25 in Scotland of the new 45% advanced rate on income (excluding dividend and savings income) between £75,000 and £125,140 and the one percentage point increase in the top rate to 48%.

• Your client expects to have higher income in 2024/25 than 2023/24.

In favour of deferral:

• For directors, the main personal NIC rate (on earnings up to £50,270) falls in 2024/25.

• Your client expects to have lower income in 2024/25 than 2023/24.

In most instances, whether to choose a dividend or bonus will depend on the marginal corporation tax rate of your company. The table below is based on an English resident higher rate taxpaying director whose company profits are £150,000 (26.5% marginal rate) or £50,000 (19% marginal rate) in the years ending 31 March 2024 and 31 March 2025. If their personal investments generate £1,000 dividend income and they wish to draw out £10,000 of gross profits, the picture looks like this: